Central Banks Diversify Gold Reserves Amid Rising Risks

Central banks are diversifying their gold reserves by storing them in multiple jurisdictions to reduce political and legal risks, according to Goldman Sachs. The Bank of England remains the most widely used foreign custodian for central banks, with 57% of respondents using it for storage, followed by the New York Fed at 14%. China is also seeking to become an alternative custody centre.

The choice of London and New York as popular locations for gold storage is due to their liquidity, allowing reserve managers to access the market quickly without requiring bars to be recertified. These centres also provide access to dollar liquidity through swaps and allow central banks to earn income by leasing their holdings.

However, storing gold abroad carries risks such as frozen assets or restricted access, as seen in the 2018 dispute involving Venezuelan gold held at the Bank of England. In contrast, keeping all reserves domestically creates other challenges, including funding physical security, audits, and insurance, and holdings may face local political or security risks.

Goldman estimates that central banks bought 57 tonnes of gold in June, compared to a pre-2022 monthly average of 17 tonnes. China was the largest identifiable buyer, purchasing 40 tonnes, while 32 tonnes of monetary gold entered London, which Goldman interpreted as a custody transfer rather than planned selling.

Goldman expects reserve diversification to remain a multi-year trend following the 2022 freezing of Russia's reserves and maintains its end-2026 gold forecast of $4,900 per ounce, supported by projected central bank purchases averaging 50 tonnes per month this year.